* TrimTabs suggests government manipulated stocks
* Analysts say government’s financial rescues have fueled conspiracy theories
NEW YORK (MarketWatch) — The unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market.
“We cannot identify the source of the new money that pushed stock prices up so far so fast,” Biderman said in a statement Tuesday.
The source of approximately $600 billion net new cash necessary to lift the market’s overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn’t come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.
“We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?”
The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 Index on a monthly basis.
Conspiracy theories on the rise?
Market analysts, however, were quick to debunk the theory. Yes, the government had a heavy hand in rescuing the financial system and the economy as the system started collapsing in late 2008 and throughout 2009. But the huge boosts of liquidity through the system found their way to stocks by the usual means, they said.
“The idea that this is magic is nonsense,” said Barry Ritholtz, market strategist at Fusion IQ and a market veteran. “This was a normal behavior in a recessionary bear market. We saw the Dow plunge 5,000 points in 6 months, which had never happened before and created a dramatically oversold market.”
Yes, the Federal Reserve slashed interest rates to near zero and Congress allowed banks to keep their bad loans off their books, allowing them to pretend they were solvent, he said.
But “you can’t short stocks when the Fed is at zero,” Ritholtz said. “Our own institutional clients came on board” as did other big institutional investors, he said.
Conspiracy theories about the so-called “plunge protection team,” or PPT, have been on the rise ever since the U.S. government started to bail out financial institutions in late 2008 under the administration of then-President George W. Bush, according to Dan Greenhaus, market strategist at Miller Tabak.
The PPT is a nickname given by some to a group established by President Ronald Reagan in 1988 after the 1987 stock crash to coordinate governmental response to market meltdowns.
Noting that the Fed has been buying Treasurys and mortgage-backed securities to keep interest rates low and support the economy, even firms such as Sprott Asset Management have started to accuse the U.S. government of running a Ponzi scheme.
“There’s a lot of backlash against the government right now and the hate for the Fed has gone into overdrive” in some corners, Greenhaus said. “The fact that the government stepped into the abyss [angered] a lot of people, and the fact that things are better a year later flies in the face of some long-held beliefs about free markets.”
As to the scale and power of the 2009 rally, it actually trailed previous recoveries from bear markets, according to research from Miller Tabak.
“While the absolute percentage gain off the recent lows has been more powerful than anything since the Depression era, there is no denying that historical rallies in the equity market have recouped a greater percentage of the declines from the highs,” Greenhaus wrote in a note.
The stock market, as measured by the S&P 500, plunged nearly 57% from its 2007 highs until it reached lows in March of 2009.
But even after rallying 58% in the seven months after the March lows, the market remained 31.5% off of its 2007 highs. That’s nearly the same amount recovered during the market rally of 2003, as the market began to recover from the bursting of the tech bubble.
In other instances, such as 1975, 1962 and 1938, the market had actually recovered a much bigger portion of its losses seven months after hitting lows. And in 1983, it was actually 7.3% above its previous highs.
Nick Godt is MarketWatch’s markets editor, based in New York.
By Nick Godt, MarketWatch
Jan. 5, 2010, 5:47 p.m. EST